A New Way To Rate Companies

Courant 100's Approach Weighs Profits, Growth, Shareholder Return

They are remarkably diverse, representing virtually every Connecticut industry and ranging in size from $11 million in annual sales to $31 billion.

Some, such as United Technologies Corp., have posted strong results year-in, year-out. Others, among them Memry Corp., are riding a wave.

All of them emerged as winners this year in the first of what The Courant expects to be an annual chronicle of the best-performing publicly traded companies based in Connecticut. The ranking is based on a composite score that accounts for profits, growth and shareholder return.

What does it mean to be the best in this ranking? Publicly traded companies are in business to deliver shareholder value, so why shouldn't we just post the top stock market performers and be done with it?

Our purpose was broader: to assemble a set of measures that, taken together, highlight the companies that are the best managed. Stock value is a healthy part of that measurement, but only a part, because the markets tend toward a herd mentality. And we saw the herd judge poorly in the run-up of share prices for Internet and networking companies in the late 1990s.

Profits -- in proportion to a company's size, and in comparison with the prior year -- are at the heart of the matter. When a company earns more, it can invest more, develop products or give money back to shareholders.

Revenue growth is also part of the measurement, not because bigger is better, but because growth is a sign of strength. Overpaying for growth, as Aetna did in 1996 when it bought U.S. Healthcare, brings its own financial punishments.

Employment growth might seem irrelevant, or even counter to the ideals of making money or building a strong economy. But in our view, these companies are part of a community, and the number of jobs they create, directly, has a place in measuring quality.

Whether this list truly reflects the best-managed public companies is a matter of debate, and that's the real goal here. It's the corporate equivalent of Mantle vs. Mays.

Hugh Johnson, chief investment strategist at First Albany Corp., who offered some advice as we honed the formula, suggested that a more accurate ranking would tailor the yardsticks for different industries, and for different sizes of companies. We didn't do that, in part to keep it simple. We did balance the factors to give a fair and equal chance to companies large and small, in every industry.

Every company was assigned a score of 0 (the lowest) to 100 (the highest) in each of seven categories: Return on capital for the latest fiscal year (the broadest measure of how a company uses the money available to it to make more money); 2-year shareholder return; 1-year improvement in profit margin; 1-year revenue growth by dollars, 1-year revenue growth by percentage, 1-year employment growth by total jobs and 1-year employment growth by percentage.

Within each category, values were assigned based on a combination of distance from the average and rank above and below the average. So, a company with an extreme performance in a category -- say, UST's 64 percent return on capital -- would be more than just an equal notch above the No. 2 company in that category, but would not be given a score in full proportion to its performance.

Each of the seven values was then multiplied by a factor for weighting: 0.3, or 30 percent, for return on capital; 25 percent for shareholder return; 15 percent for profit improvement; 10 percent for each of the revenue categories; and 5 percent for each of the employment categories.

The scores were added together for a final composite score.

The highest companies with a net profit in each of the past two years comprise the Top 25 list. Companies that posted a net loss in 2002 were eligible for the The Top 10 Comeback list.